The Canadian dollar is slowly sinking under the weight of negative sentiment. Heightened trade tensions, a rift in the "bromance" between Prime Minister Justin Trudeau and U.S. President Donald Trump and divergent interest rate policies between the U.S. Federal Reserve and the Bank of Canada have led to a 4.2% slide in the value of the Canadian dollar against its U.S. counterpart in less than two months.
Trade uncertainty has clouded the Bank of Canada’s economic outlook all year. Those clouds looked like they were clearing in April. Reports that the North American Free Trade Agreement partners were trying to fast-track a deal which would have been announced at the Peru "Summit of the Americas. It didn’t happen. U.S. House Speaker Paul Ryan suggested May 12 as the latest date that a NAFTA deal proposal would give Congress time to review it.
The talk of a pending NAFTA deal gave the Bank of Canada enough clarity that in their May 30 statement they dropped "cautious" from their forward guidance. That move fed predictions for a BoC rate increase in July.
The G-7 fiasco questions that outlook. Trudeau really irked Trump when he used his press conference to set himself up as "Captain Canada", defending all Canadians against the bullying tactics of the Americans. Trump called Trudeau dishonest and raged against Canada’s unfair dairy and agricultural trade practices.
The Canadian dollar slid and had not recovered. In a few hours, the U.S. Federal Open Market Committee (FOMC) will release their policy statement and economic projections. A press conference by Fed chair Jerome Powell will follow.
The U.S. dollar has been grinding higher ahead of this meeting and will likely add to those gains. A 0.25% rate increase is all but guaranteed.
Economists and strategists expect that the recent series of strong economic reports will result in upward revisions to growth forecasts. More importantly, the Fed’s dot-plot estimates for interest rates may suggest a total of four hikes in 2018, rather than the three hikes that it shows now.
The risk that the Bank of Canada will leave rates unchanged while the Fed is increasing the pace of U.S. rate increases is undermining the Canadian dollar.
Oil prices are another Canadian-dollar-negative. WTI oil prices have been trading softer for the past two weeks. Yesterday, the monthly Organization of the Petroleum Exporting Countries (OPEC) oil report indicated that the production cuts had achieved their objective of reducing oil inventories to their five-year average. Traders are concerned that the OPEC quotas will be scrapped leading to lower crude prices, a Canadian dollar negative.
FX trading will be quiet until the 2:00 p.m. FOMC meeting results.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
